Firm Dynamics and the Minimum Wage: A Putty-Clay Approach
AbstractWe document two new facts about the market-level response to minimum wage hikes: firm exit and entry both rise. These results pose a puzzle: canonical models of firm dynamics predict that exit rises but that entry falls. We develop a model of firm dynamics based on putty-clay technology and show that it is consistent with the increase in both exit and entry. The putty-clay model is also consistent with the small short-run employment effects of minimum wage hikes commonly found in empirical work. However, unlike monopsony-based explanations for small short-run employment effects, the model implies that the efficiency consequences of minimum wages are potentially large.
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Bibliographic InfoPaper provided by Federal Reserve Bank of Chicago in its series Working Paper Series with number WP-2013-26.
Length: 61 pages
Date of creation: 14 Dec 2013
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Find related papers by JEL classification:
- J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
- J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
- L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
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